July 27, 2010

Libertarian economists Tyler Cowen and Adam Ozimek are worried that a potential nominee for head of the new Consumer Financial Protection Bureau, Harvard Law School bankruptcy expert Elizabeth Warren, might (or might not) favor legal restrictions on high interest loans. Ozimek writes:

My concern is that the agency will go for restrictions that liberals tend to like but that limit credit for those who need it most, like usury laws. This fear seems like a good reason to side with Tim Geithner in (supposedly) opposing Elizabeth Warren as head of the agency. I think a good test as to whether you should support Warren is how you feel about payday lending. If you’re the type of person who thinks that interest rates of 200% are crazy and shouldn’t be permitted, then you probably will like Warren as head of CFPB

Here's Bill Maher interviewing Warren, where he raises the topic of "usury laws" and she points out that we had legal limits on interest rates until the Supreme Court tossed them out in 1979. I don't see in the clip that she endorsed usury limits, just rules requiring effective interest rates to be transparently obvious to borrowers. (I reviewed here the 2003 book The Two-Income Trap that Warren wrote with her daughter : "I came away just plain liking these two ladies and their down-to-earth approach based on both formal data and the realities of daily life.")

I am curious about the modern liberal take on autonomy and credit. Let's say that two gay men, of unknown health status, want to have informed, consensual, unprotected sex. Should the law prohibit this? ...

The unprotected sex is riskier and less prudent than borrowing money at an annualized rate of two hundred percent. Why prohibit one and not the other? Many of the borrowers are being fooled, but others have legitimate reasons to seek the money, such as wanting to buy a birthday present for a visit to one's child, living with a separated spouse.

Is it that sex is sacred but borrowing money is not? What if you're borrowing money to catch a plane to go have sex? Isn't sex a big reason why people might borrow money at high annualized rates? Aren't "sex decisions" some of the least rational we make and the most prone to error? ...

How many of you would support this same woman -- with enthusiasm -- if she wanted to ban risky but consensual sex?

One Marginal Revolution commenter actually has some useful information to contribute:

"No Authority To Impose Usury Limit- No provision of this title shall be construed as conferring authority on the Bureau to establish a usury limit applicable to an extension of credit offered or made by a covered person to a consumer, unless explicitly authorized by law."

That's a quote from the consumer protection portion of the financial reform bill. Warren, if nominated and confirmed, will have zero authority to stop high interest rate loans, payday loans, etc. Indeed if you listen to her interviews her primary focus is on disclosure and on consumers understanding their contracts. So I think it is misleading to imply that she will just put a bunch of usury caps on when she has no power to do so.

So, don't worry, the right to engage in usury remains sacrosanct.

But, I'm increasingly fascinated by how citing actual huge examples when arguing is now considered in poor taste. My natural reaction when thinking about anything is to look at the most important examples -- why not kill to birds with one stone -- but that's not proper etiquette these days.

For example, gay liberation in the late 1960s and 1970s in places like Greenwich Village, the Castro district and West Hollywood (e.g., the end of police raids on gay bars after the Stonewall Riot following Judy Garland's funeral in 1969) led directly to the AIDS epidemic breaking out about a decade later in places like Greenwich Village, the Castro district and West Hollywood.

The Bush Administration's war against traditional lending standards, such as down payments and limited interest rates, in the name of "Increasing Minority Homeownership" (the title of Bush's 10/15/02 White House Conference) led directly to massive lending to people who previously wouldn't have gotten mortgages in places like the Inland Empire, Las Vegas, and Phoenix, which led directly to massive foreclosures in places like the Inland Empire, Las Vegas, and Phoenix, which is what started the Great Recession.

Maybe we shouldn't have any laws regulating bathhouses or subprime lending, but we at least ought to be able to talk about the costs associated with them.

It's striking how the history of the biggest American public health story of the last half century, the AIDS epidemic, has been rewritten to conform to the demands of Who? Whom? thinking.

We've all been taught to reason according to the following logic:

A. Gays Are Good;

B. So, Anybody Who Mentions Anything Not Good About Gays Must Be:

C. Bad

Therefore, the AIDS epidemic couldn't possibly have been self-inflicted. It had to be the fault of, say, Ronald Reagan, or of homophobic Mormons in Provo, or of something, anything, other than what actually happened.

QED

Of course, exactly the same process is happening to recollections of the mortgage meltdown.

Similarly, the historical connection between money-lending and Jews has come to subtly influence much of the economics profession to view anyone not utterly allergic to prudential limits on lending, even lending of the most "Heads we win, tails the taxpayers bail us out" variety, as probably a raging anti-Semitism and thus illegitimate.

This essentially childish "Who? Whom?" style of thinking is becoming ever more prestigious at the highest levels of the modern world.

I with you Steve. That the "history" we all lived through together and should personally remember quite well, thank you very much is being re-written in more or less real-time to suit some banal political expediency leaves me stupefied. I really can't believe it's gotten this bad.

A lot of people doing the "Who/Whom thinking" and decision making had ancestors who profited off usury.

If you want an even more detailed look at the link between homosexual promiscuity and AIDS, read some of Michael Fumento's writings. It'll give you a sense of how difficult it is to actually get AIDS if you happen to be a straight male. AIDS is essentially a disease of gays, needle drug users, and their female partners (mostly lower income and uneducated black women).

Fun Fact: AIDS initially was called GRID (Gay Related Immune Deficiency). Then the usual suspects got the name changed to something more politically correct.

Bad news folks: JD Hayworth is down 20 points in Arizona, with McCain holding a 54-34 advantage heading into the August Republican Senate primary. If you live in Arizona, please vote. JD can't do this alone...... By the way, JD has a new ad up knocking McCain for his support of the amnesty. Hopefully, Arizona Republicans will see the light.

If you think that there's anything noble or virtuous or productive or constructive or even useful about people with IQs of 120+ becoming filthy rich by exploiting the stupidity of people with IQs of 90-, then you need to...

No Steve. You're dead wrong. The reason why talking about outlawing usury or even disclosing it is NOT and I repeat NOT (possibly the dumbest thing you've ever said) "the historic connection between money lending and Jews."

It is about money. Or more precisely, as detailed in "the Big Short" the astonishing amount of money Wall Street (like say, Berkshire Hathaway, a major investor in Goldman Sachs) makes securitizing junk loans like payday loans, credit card receivables, motorcycle loans, car loans, and selling them off to suckers er pension funds, banks, etc.

Secondarily it is about easy credit replacing actual growing income. A fools game in the end but one that can go on for some time.

Its not about the Jews, and almost never is. It is about MONEY. And POLITICS. Most of the big money on Wall Street depends on generating icky credit for questionable stuff and selling it as bonds.

AIDS? The power of the Gay Lobby is unquestionable. Why? Because White middle class women find them "adorable" (i.e. guys who don't hit on them) and thus the "model" for all those guys who work around them whose attentions they'd rather not have. Jews lack that kind of power (Oliver Stone felt free to talk of "the Lighter Side of Hitler" and how the Holocaust was all a "Jewish propaganda" plot that also "f---'ed American foreign policy towards Israel."

Jews don't even have the power in Hollywood to make Stone keep his mouth shut. The ADL, Simon Wiesenthal Center, etc. all denounced him. But it won't matter -- he's Oliver Stone and they're ... Jews. Any more than Mel Gibson will suffer more than a hiccup in his career.

I am curious about the modern liberal take on autonomy and credit. Let's say that two gay men, of unknown health status, want to have informed, consensual, unprotected sex. Should the law prohibit this? ...

One reason for the Fourth Amendment is to spare us the trouble of deciding about which private activities to prohibit. Only those that create recognizable negative externalities can trigger the process that leads to a search or arrest warrant.

The unprotected sex is riskier and less prudent than borrowing money at an annualized rate of two hundred percent. Why prohibit one and not the other?

This is silly. Of course, if being charged 200% interest is harmful, the "risk" associated with borrowing at a rate of 200% per annum is 100%. The risk from "unprotected sex" is necessarily lower.

There's a big difference between credit bubble mortgages and day compared to payday loans. Even though some bad credit risks paid higher interest rates on their mortgages, those interest rates were nowhere near high enough to compensate lenders for the default risk. That's why there was such a frenzy to package the garbage mortgages into mortgage backed securities and then into collateralized debt obligations - a big financial game of hot potato that ended up burning banks (and ultimately tax payers) from here to Germany.

Payday loans, on the other hand, are profitable, because they charge interest rates commensurate with the risk. You may think 200% annualized is usury, but when you get in a fix where you need a payday lender, all options are usurious. Try figuring out the effective annualized interest rate represented by a bounced check fee from your typical savings bank and your local utility. Add in the cost of reconnecting your power. You'll end up with way higher than 200% annualized interest.

Since there's no commercially viable way to lend to payday loan customers at non-usurious rates, what would you prefer, having the government subsidize a securitization market for the payday loan industry to lower rates, like it did with the mortgage industry? That didn't work out too well.

The real problem here is the one you've touched on before, that the bottom 40% isn't making enough money, due to outsourcing, mass immigration, etc., and the government has encouraged the income gap to be papered over with consumer debt. Which leads to a policy pendulum of stupidity: when consumer lenders don't extend enough credit to bad credit risks (i.e., poor people), they get censured; and when the extend to much, they get slapped down for their "predatory lending".

To explain it in language that economists should understand, the problem with usury laws are the negative externalities. When times are desperate wives and children get beaten, marriages fall apart, jobs are lost, and inevitably the burden of this falls on the criminal justice system and social nets. Instead of talking out of his ear about things he doesn't know about, Tyler Cowen should try to act more like an economist and tell us about studies linking usury to all sorts of bad consequences.

I lean libertarian on a lot of issues, but not about clarity of terms and acknowledgment of risk. For instance, I don't want govt telling me what I can eat, but I do like a food label, and would like to see some better reg there. Sure govt should allow us to make stupid decisions about sex, but i agree that it should be honest about with the public about the repercussions of those decisions. The way they spin it, you would figure that the biggest threat to a gay man's health was an attack by a homophobe and not his own reckless actions.

The danger of people like Elizabeth Warren is they seek to govern the behavior of others. Maybe usury laws are good law, maybe not. One thing is certain, however, and that is someone who seeks to solve problems by suggesting and then leading a new government entity is a very power hungry person.

My guess is that Elizabeth Warren does not believe in HBD or even know what it is. She, therefore, cannot even begin to pontificate on the true nature of the high risk lending market and it's totality of dynamics.

These people are very dangerous. They will stop at nothing but total capitulation.

I suspect usury laws track with the whole smart/dumb divide discussed in The Bell Curve. I prefer free markets wherever possible, and I'm not convinced capping interest rates is a good policy at all. But somehow, we need laws (and other parts of this society) that aren't optimized to grind people up in the gears when they have, say, an IQ of 80 and not much education. (It's not like tons of education are going to benefit you much, with an IQ of 80.)

Whatever you think about what she might do on lending regulation, the fact is she is a shameless fabricator of research, and you should have been a lot more sceptical of the Two-Income Trap. Megan McArdle has some useful demolitions of her incompetent hackery. It is plain for anyone to see that she will abuse the power of this position as a platform to advocate socialist idiocies and build out yet another wedge of permanent socialist empire in yet another area, under cover of the most shoddy and dishonest research.http://www.theatlantic.com/business/archive/2009/06/elizabeth-warren-and-the-terrible-horrible-no-good-very-bad-utterly-misleading-bankruptcy-study/18826/http://www.theatlantic.com/business/archive/2009/06/why-elizabeth-warrens-new-bankruptcy-study-is-so-bad/18835/http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/

Not extending credit at all involves a dead-weight loss. There is a price at which extending credit to high-risk people becomes profitable, and denying those people credit at all, by means of paternalistic laws, will deny those people value they could use at a rate which people would be willing to lend it at. Win/win. The rational distribution of resources. Usury laws are simply price-fixing laws.

"Gay liberation in the late 1960s and 1970s in places like Greenwich Village, the Castro district and West Hollywood ... led directly to the AIDS epidemic breaking out about a decade later in places like Greenwich Village, the Castro district and West Hollywood."

"Directly"? Hmm, I dunno, I think you may be skipping a few steps in there.

In my view, Gay lib itself didn't lead to AIDS. Exxxxxtreme promiscuity, excessive drug use, contempt for condoms, and the politically-driven transformation of anal sex from something not all that many gayguys did (according to some older gay gents I've known) into the symbol of homosexuality itself ... That's the combo of factors that led to AIDS.

Did Gay Lib automatically and inevitably lead to excessive drug use, crazily irresponsible promiscuity, and a tendency to think of anal sex as the Greatest Thing Ever? Maybe, but I think that case has yet to be made.

Not totally a propos here, but what the heck: I found Richard Berkowitz's book "The Invention of Safe Sex" (about the Gay Lib years and the arrival of AIDS) darned honest and interesting. Here's one summary of it:

I'm not going to look up the figures now, but I know that 25 years after the first warnings of the AIDS epidemic exploring among heteros, the majority of new cases are still caused by male male sex, with or without drug use.

In my book, even a 'misleading' study which deals with actual data trumps opinionating. Warren's empirical study of health care costs and bankruptcy chose to not highlight the drastic decline in absolute numbers of bankruptcies, probably (1) absolute numbers have no bearing on the percentage of bankruptcies affected by health costa and (2) bankruptcy laws were drastically tightened in the last few years.

So, I go to Google Scholar to see exactly what Ms. McArdle has published. Come up with some opinion pieces and something about ebusiness, with one of several authors listed as 'Meghan' McCardle. Then I look at her bio blurb

"Megan McArdle is the business and economics editor for The Atlantic. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and the Economist."

McArdle appears never to have conducted any orginal data analysis -- glad to be corrected on that point, but as for now for me she is a person with zero published data analysis criticizing someone who, you know, actually crunched some numbers.

200% is nothing. Here in the UK payday lenders advertise on daytime TV, and have to show typical APR in the small print onscreen. The typical payday lender APR looks like around 2300%, but I've seen over 20,000% advertised. Meanwhile my mortgage APR is 1.24%.

I doubt that the people who are the targets of these ads have any idea what that means.

Autistic economists tend to forgot that, in modern America, everyone belongs to everyone else. If somebody screws up their finances with payday loans, they're going to end up burdening the taxpayer. The rational thing from the point of view of a net taxpayer (like me) would be to ban payday lending.

Same thing with homosexuality, for reasons you described. But I would be less inclined to outlaw homosexuality, because that's a hell of an intrusion on people's personal lives. So, yes, gay sex is sacred, at least compared to payday lending.

I love when people conclude that they have the right to make decisions for people with an IQ of 80. Have you ever asked if they want you to lord over them? You can point out how you will obviously make better decisions for them. Its just natural, right? You were born with spurs and they a saddle. I guess a person with a self perceived IQ of 120 feels the same way about people witrh an IQ of 100.

But, his continued insistence to try to find a way out of the dilemma of gay liberation leading directly to AIDS is mightly puzzling.

If we'd kept gay men in the closet, the AIDS epidemic wouldn't have happened. Period.

Ray is not fond of the Christian concept of sin. One of his most endearing, but probably misdirected, traits is a determination to believe that sex is cheerful, fun and recreational. That sex might have another, darker side... well, Ray doesn't much care for that.

Thus, the dissembling and the constant attempts to try to find a way around the sad reality of gay liberation and the AIDS epidemic.

If you think that there's anything noble or virtuous or productive or constructive or even useful about people with IQs of 120+ becoming filthy rich by exploiting the stupidity of people with IQs of 90-

You know, in thinking about this last night, it dawned on me that the Constitution for our New Republic [which will arise to succeed the imminent implosion and disintegration of the existing Demos Kratia] might need a clause like the following:

No person with an IQ lower than 90 may enter into a contract in the absence of a court-approved legal guardian.

The financial regulation bill *explicitly forbids* the new consumer protection agency from setting usury caps on interest rates, so I really don't understand what this argument is about.

Also, hasn't Steve ever seen or read "And The Band Played On"? Best-selling book and hit movie (or TV show, can't remember), written by a gay guy, that detailed exactly his argument about gay behavior causing AIDS. There have been a lot of limits on bathhouses put in since the 70s too, although the point Steve makes is still well taken. Important interest groups value the freedom of sexual choice more than the freedom of economic choice.

Since 1979 you have rarely heard of anyone having their legs broken for non-payment, or for that matter any mention of loansharks.

If you want to bring back usury laws you will bring back loansharks, just as surely as bringing back prohibition will bring back speakyeasies, bathtub gin etc."

You make a good point. Although it's possible that it is better for society overall to make disreputable transactions explicity disreputable. I.e. people who gamble away the rent money will have to reckon with getting their legs broken, and people who make their living as loansharks get stuck with being known as "criminals" rather than "businessmen".

No Steve. You're dead wrong. The reason why talking about outlawing usury or even disclosing it is NOT and I repeat NOT (possibly the dumbest thing you've ever said) "the historic connection between money lending and Jews.""

Yeah, the reason that loan-sharks were often called "shylocks" stems from their known fondness for the works of Shakespeare.

"Jews don't even have the power in Hollywood to make Stone keep his mouth shut."

They have the power to make him instantly recant. If you say that there is strong jewish influence in the media, they will deny any such thing......and then crush you like a bug.

Foolish and misleading to calculate a payday loan in terms of APR since the period of the loan is so short. Who's going to lend a low income person $200 for 2weeks to pay the gas bill if the payoff is $1.50 (roughly 20% APR)? I would think 200% is the absolute minimum you could charge and still make money on a short-term loan after administrative costs and default risk is priced in.

Maguro makes a good point (IRT payday loans). The amounts are smaller than typical banks want to deal with, the loan periods are short. The loan department needs to make a surplus in order to pay the people who man the store, get the money to loan, etc. Non-profits have tried to do this and couldn't charge under 200% either.

"If we'd kept gay men in the closet, the AIDS epidemic wouldn't have happened. Period."

It isn't your place to decide that gays should be in the closet, though. What risks we want to take and how we live our lives are up to us, not you.

A black woman writer (I forget her name and can't google it right now, but she wrote "Their Eyes Were Watching God") said that slavery was the price Blacks paid for civilization. Well as a gay man I can say that the gay AIDS epidemic was the price we paid for liberation, and I far prefer the situation today, where the threat of AIDS moderates my behavior, to the situation pre-Stonewall where I would have had to skulk about in dark bars and hide who I from my family and friends.

I love when people conclude that they have the right to make decisions for people with an IQ of 80. Have you ever asked if they want you to lord over them? You can point out how you will obviously make better decisions for them.

Have you ever considered your point in the context of 85-IQ African-American children? How many of them would prefer $10,000 in cash annually rather than the expenditure of $10,000 annually on their education?

Shouting Thomas is one of my faves and it's great running into him on iSteve. I think here he misses my point, though. Imagine Gay Lib (or at least some general leaving-the-closet moment in gay history) without the crazed '70s use of drugs, without the extolling of anal sex as the be-all and end-all of gay-ness, and with condoms. Promiscuity would have been moderated, and infectious diseases much less rampant. AIDS might never have gotten a toehold. What created the AIDS epidemic wasn't Gay Lib per se but loads and loads of drug-fueled, unprotected buttfucking.

Well as a gay man I can say that the gay AIDS epidemic was the price we paid for liberation, and I far prefer the situation today, where the threat of AIDS moderates my behavior, to the situation pre-Stonewall where I would have had to skulk about in dark bars and hide who I from my family and friends.

At least, some honesty. I can buy that.

How about the millions of non-gays who died from AIDS because of the behavior of gays?

I think that a lot of skulking around in dark bars is still happening. How about if your family and friends would just as soon you keep your mouth shut about your private life?

I'd just as soon you kept your mouth shut about your private life. I don't want to know.

"I far prefer the situation today, where the threat of AIDS moderates my behavior, to the situation pre-Stonewall where I would have had to skulk about in dark bars and hide who I from my family and friends."

Sure. If you're a gay man who's actually sensible and doesn't do any of this barebacking silliness, life is pretty good. You can even get married in a few states.

In the US, most people who didn't engage in anal sex with multiple partners, share needles, or get blood transfusions weren't actually at very high risk of getting HIV. We are amazingly lucky HIV is so hard to catch, or we might have seen the kind of godawful devastation that struck the gay community, applied to some large chunk of the sexually active straight community as well.

Jews don't even have the power in Hollywood to make Stone keep his mouth shut. The ADL, Simon Wiesenthal Center, etc. all denounced him.

It would matter hugely if he hadn't already made such a name for himself before he said it. Same is true of Mel Gibson. Jewish control or huge influence in Hollywood or on TV or in the most influential print media isn't total but it's large, very large.

Steve on the subject, a year and a half ago. You're a total white washer on this subject Whiskey and you also make stuff up left and right:

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